On behalf of the Maldivian authorities, we would like to thank Mr. Cerutti and his team for a constructive and effective Article IV mission as well as candid policy discussions. Our Maldivian authorities would like to also extend their gratitude for the emergency financing received under the Rapid Credit Facility last year, which was helpful in meeting liquidity needs and scaling up the health response to the pandemic. The authorities look forward to continuing their close engagement with the Fund, and highly appreciate the IMF’s valuable technical assistance.

The COVID-19 pandemic and Recent Economic Developments

The COVID-19 pandemic is the largest shock to ever hit the Maldives’ economy. With an estimated GDP contraction of 32% in 2020, Maldives suffered one of the sharpest economic declines in the world, due to its heavy dependence on the tourism sector. To contain the spread of the virus, the country closed its borders for the first time in history, between March 27 and July 15, 2020, leading to a sudden stop in tourism - the main driver of growth, jobs, and revenues. Construction activity also came to a halt, and nearly all major economic sectors, including transport, communication, and trade recorded negative growth in 2020 due to the dampening effects of the lockdown and border closure. The social and economic impact of the crisis were devastating with thousands of livelihoods affected by the shutdown of tourism and construction activities. The pandemic has led to an increase in the estimated poverty rate, by 5.1 percentage points in 2020, after years of steady decline, according to the World Bank. The impact of the pandemic was more protracted and severe than initially envisaged at the time of the RCF request.

Eighteen months into the Covid-19 crisis, the Maldivian economy is in a much better position than in mid-2020 and is also among the quickest countries to rebound from the crisis in 2021. The partial recovery in tourism sector, which accounts for around 26% of real output, has significantly exceeded expectations when compared to initial forecasts for the first half of 2021. By the end of August, the total arrivals to the Maldives exceeded 750,000 with an increase of 87% compared with that of 2020. Another positive indicator has been the improvement in the average duration of stay of tourists, which has increased to 9 days in 2021.

In the medium term, the authorities remain committed to rebuild macroeconomic buffers and safeguard macroeconomic stability, lay the foundations for a robust and sustainable growth, and put the debt on a sustainable path. The authorities broadly agree with staff’s medium-term economic outlook and expect that the recovery will gain more momentum in 2022. In the absence of future shocks, the economy is expected to reach pre-Covid levels in 2023. The authorities, however, will remain vigilant amid the uncertainties surrounding the pandemic.

The response to the COVID-19 pandemic

The Maldives has moved swiftly with well-coordinated policy responses to mitigate the health and economic effects on the COVID-19 pandemic. The authorities spent significant fiscal resources to deal with the impact of the COVID-19 pandemic, by adopting a “COVID-19 Health and Social Response” of about 3.1 percent of GDP and an “Economic Relief Package” of about 3.0 percent of GDP, totaling 6.1 percent of GDP as of June 24, 2021, to alleviate the impact on households, workers, and businesses. As a result, the Government was able to assist around 23 thousand individuals through the income support allowance scheme, and more than 2,100 small and mediumenterprises and 410 large businesses through the recovery loan scheme, which helped prevent widespread layoffs and bankruptcies.

With vaccinations continuing to roll out at a fast pace, the Maldives is well placed to take early advantage of the global economic recovery. As of September 5^th, 2021, more than 70% of the population had received the first dose and almost 56% received the second dose. Moreover, the vaccination drive for children aged 12 to 17 is already in progress. With the success of the Covid-19 management strategy, the economy is well-positioned to maintain the growth momentum. Vaccination efforts have been supported through the generosity of the international community.

Fiscal Policy and Reforms

The Ministry of Finance has continued its efficient management of the fiscal policy throughout the crisis. The fiscal response to mitigate the widespread socioeconomic impact of the pandemic was timely and decisive and geared towards alleviating the pandemic’s adverse impact through preserving lives and supporting the economy. With the tourism sector effectively on a halt, the Government was the only sector left to support the economy and prevent it from going into an even deeper recession. An increase in the fiscal deficit and public debt was therefore unavoidable. As the revenue projections for 2020 declined by 50% from initial projections, due to the Covid-19 pandemic, the Government was forced to substantially reduce its expenditures on nonessential activities to create the fiscal space required to fund the additional spending on health, social security, and economic relief. The expenditure reductions included salary deductions and reduction in operating expenditures including travel, as well as halting of all projects, that exhibited insufficient progress. To improve fiscal performance, the authorities have also reduced and delayed specific capital spending. As a proactive measure, they also carried a liability management exercise through an any and-all tender offer where 76.76% of the Eurobond maturing in mid-2022 was tendered and settled from a 5- year Sukuk issued under a Sukuk Issuance Program. The Maldives has also participated in the G20 debt suspension under the Debt Service Suspension Initiative, which contributed to reducing foreign debt service, however this relief was not as much as expected.

The fiscal policy for 2021 continues to prioritize the support to the economic recovery. Going forward, the authorities will continue to reduce financing needs and rely further on foreign financed projects with secured financing at favorable rates to improve the financing of the deficit over the medium-term. Progress has been made on managing public investment execution including achieving greater transparency with the support of the World Bank. The authorities remain committed to improving the fiscal framework by further enhancing the oversight of SOEs and moving forward with a better designed Fiscal Responsibility Act. They are also revising the Public Debt Law. The authorities have restricted ongoing capital spending to those infrastructure projects¹ that were initiated in 2019, and that were backed by secure financing at favorable rates. These projects will play an important role to support growth and recovery from this crisis. They also note that rescheduling these projects would further postpone the associated social and economic benefits and may increase costs due to implementation delays.

The Medium-Term Fiscal Strategy 2022-2024 rightly focuses on recovering from the economic and fiscal impact of the Covid-19 pandemic and establishing a sustainable fiscal policy for the medium-term by reducing the primary budget deficit to GDP ratio to 5% and the Budgetary Central Government Debt to GDP ratio to 105% by 2023. The authorities agree with staff that fiscal consolidation should be resumed in a growth friendly manner once the recovery is firmly established and in a way that minimizes disruptions to the economy. It is important to highlight that workers, families and businesses are themselves recovering from the crisis and therefore fiscal consolidation should be carried out in a way that does not worsen their prospects. Fiscal consolidation will target the wastages created by the inefficiencies in government subsidy schemes, government expenditure on SOEs, and government operational expenditures. On the revenue side, the Government is committed to see through the implementation of the New Revenue Measures proposed in 2019 and 2020. The Government has also announced a medium-term privatization program to improve the corporate governance and performance of SOEs and to reduce their reliance on government support. The authorities will continue focusing on updating the PFM roadmap, managing fiscal risks (mainly from SOEs), and updating the legal framework related to debt management. They are grateful, in this regard, for the extensive IMF support being provided in enhancing revenue administration and collection, as well as providing advice on reforms in tax policy.

Debt Sustainability Assessment

While the debt-to-GDP ratio increased in 2020 due to the widening of the fiscal deficit and the sharp contraction in nominal GDP as a result of the Covid-19 pandemic, the government remains in a position to comfortably honor all debt obligations. The authorities believe that the “Low-Income Country Debt Sustainability Framework (LICDSF)” needs to be adapted for a country with the special circumstances of the Maldives. First, the sharp rise in the debt-to-GDP ratio in 2020 was mostly due to the fall in GDP rather than an increase in public spending. Indeed, overall public spending was lower than projected for the year. Second, most of the Maldives’ debt stock is at highly concessional rates. Third, the authorities have been proactively managing rollover risks in their outstanding Eurobonds. Fourth, unlike most of the countries in the LICDSF, the Maldives has access to international financial markets. The recent sukuk issuance, which was oversubscribed threefold, is a signal of the healthy demand for the sovereign debt of the Maldives. Securing concessional financing from bilateral and multilateral partners remains central to the Government’s strategy. As the economy recovers, the debt-to-GDP will improve with fiscal consolidation measures in place and strong GDP growth expected in the medium term. The authorities would also like to emphasize the role of the Sovereign Development Fund (SDF) in mitigating financing risks over the medium term and intend to continue building up funds for repaying debt. The recovery in arrivals and the increase in Airport Development Fee rates will result in higher amounts being accrued in SDF in the medium term. The Government also plans to introduce a law which would improve the governance and management of the SDF.

Monetary policy and financial stability

The Maldives Monetary Authority (MMA) has continued its strong track record of skillful management of the monetary and financial policy. A number of measures were taken by the MMA to mitigate the effects of the pandemic in addition to protecting the stability of the financial sector. These include: (i) reduction of the minimum required reserves (RR) up to 5 percent as and when required; (ii) making available a short-term credit facility to financial institutions as and when required; (iii) introducing regulatory measures to enable a moratorium on loan repayments. Moreover, the MMA intervened at the beginning of the crisis, actively providing liquidity support to the banking sector to mitigate adverse economic impacts. With the strong tourism sector recovery in recent months, the foreign exchange (FX) liquidity position of the banking sector has since improved. In order to ensure an adequate FX buffer, the MMA continues to maintain bilateral liquidity arrangements with other central banks.

The MMA has a strong and effective prudential and supervisory framework, which has helped to maintain the system’s financial soundness and resilience. The MMA has also at its disposal macro prudential policies such as reserve requirements in both rufiyaa and foreign currency, foreign currency open position limits, interbank limits, and leverage capital requirements. There are plans to review and introduce other macro prudential requirements and liquidity regulations in the future. The authorities have requested a full FSAP to be conducted in the second half of 2022. The authorities are also preparing to conduct a national risk assessment for AML/FT expected to be completed by June 2022. This assessment will help with the preparations for the AML/CFT assessment of Maldives by the Asia/Pacific Group which has been postponed to 2024. The MMA authorities will continue to diligently monitor incoming macroeconomic and financial sector data and stand ready to make necessary adjustments to their policy instruments and intervention strategy, should the need arise. The authorities take note of staff assessment of the external sector. They view that the CA gap suggested by the EBA-lite CA methodology seems to be very large.

Other Reforms, SDGs and Building Resilience to Climate Change

The COVID-19 shock has shed renewed light on the importance of strengthening the Maldives’ resilience to external shocks and diversifying its economy. The government’s Strategic Action Plan (2019-23) outlines economic and social priorities and how they will be delivered in a sustainable manner, in order to address key infrastructure issues and enduring social challenges facing the country. It also focuses on decentralization, economic diversification through expanding the fisheries and agricultural sectors, SMEs, labor, employment and migration, social protection, and governance, among others. Many reforms are aimed at enhancing the role of private sector and boosting competitiveness while supporting inclusive growth.

To enhance the National Resilience and Recovery Plan 2020-2022 and prepare for results-based budgeting framework, the authorities are reprioritizing sustainable development goals and targets, including on climate issues, to reflect urgent pandemic related developmental needs. While the Maldives ranks better than peers in poverty and inequality, the authorities are aware that more efforts are needed to ensure inclusive growth. With most Maldivians dependent on tourism and fisheries for their livelihoods, the World Bank estimates that the poverty rate increased to 7.2 percent in 2020.

Climate change, which is high on the government’s agenda, is an existential threat to the Maldives, as over 80 percent of the land is less than one meter above sea level and is therefore under threat from rising sea levels. The additional challenges associated with the country’s dispersed geography include difficult service delivery and limited opportunities for job creation and economic diversification. Addressing the Maldives’ exposure to natural disasters and climate change remains a long-term concern that also increases the need for well-planned climate-change adaptation investments.

The authorities adopted a Climate Emergency Act on April 29, 2021, which introduces the legal structure and guidelines for addressing issues related to climate change, ensuring the sustainability of natural resources, and sets out plans to achieve net-zero carbon emissions by 2030. As a climate vulnerable nation facing multiple challenges with limited resources and one that is trying to reach net zero emissions by 2030, the authorities have emphasized the need to secure grants and concessional financing to address climate needs in a sustainable manner given limited fiscal resources. So far, climate financing for the Maldives is offered at the same market rates as conventional instruments, with additional climate mitigating conditionalities, which does not make for a meaningful alternative among the financing choices. The authorities expressed the need for Fund assistance with accessing concessional climate finance and capacity development to facilitate their ease of access to climate change financing in general. They have recently completed the centralization of domestic securities issuance to the Debt Department at the Ministry of Finance.

Conclusion

The past eighteen months have presented unprecedented challenges for the Maldives. At this juncture, the health and welfare of Maldivians remain a priority. The authorities are committed to maintaining macroeconomic stability while addressing the additional challenges associated with the pandemic. They remain committed to their fiscal strategy, as well as to economic reforms, and will redouble their efforts when the crisis subsides.